Flipkart's valuation marked down again signalling continuing pain in E-commerce

After facing series of markdowns in recent past, India's e-commerce giant Flipkart has been subject to yet another markdown, this time by a mutual fund managed by the US-based investment firm Vanguard Group.

The move once again signifies the crazy billion-dollar valuations most of the E-commerce firms commanded at the height of the e-com boom despite a lack of strategy on the profitability front.

Vanguard joined four other investors by slashing the holding value of its investment in Flipkart by as much as 25 percent in the quarter through March, a VC Circle report said citing the filings with the US Securities and Exchange Commission (SEC).

With this, Flipkart has faced its sixth valuation markdown this year. Besides this, a fund managed by Morgan Stanley reduced the value of its investments twice while Fidelity Rutland Square Trust II, Valic Co., and T. Rowe Price also each lowered the value once, the report said.

From $136.87 a piece Vanguard bought on 30 September, 2015, the US-based investment firm slashed its value to $102.65 as on 31 March, 2016. Following the markdown, the overall valuation of Flipkart now stands at around $11 billion. The fund also brought down the value of the shares it bought in the second tranche to $106.71 apiece from $142.23.

The markdown comes at a time when Flipkart has repeatedly said that it is not looking at any fresh round of funding in the immediate future.

On the markdown in the valuation of Flipkart from $15.2 billion to $9.3 billion by few of its investors like Morgan Stanley, T Rowe Price, chairman Sachin Bansal said, “I do not think much of the markdowns. We should just focus on execution and keep our heads down on serving our customers," the Financial Expressreport said.

Earlier in May, Morgan Stanley Mutual Fund Trust, a mutual fund investor in Flipkart Ltd, had lowered its estimate of the online retailer’s valuation by 15.5 percent for the second successive quarter in a row.

The fund marked down the value of its Flipkart shares to $87.9 per share as of 31 March from $103.97 per share as of 31 December. The December value marked a 27 percent fall from $142.24 per share in June 2015, a Mint report said.

Following the markdown, Morgan Stanley valued Flipkart at $9.39 billion, after the online retailer was valued at $15 billion when it received $700 million from Tiger Global Management, Qatar Investment Authority and other investors midway through last year.

In May itself, small mutual fund investors Valic Co 1 marked down Flipkart’s value by 29.4 percent as of February compared with August 2015, while Fidelity Rutland Square Trust II marked down Flipkart’s value by as much as 39.6 percent as of February compared with last August.

In April, T. Rowe Price disclosed in a filing that it cut the value of its stake in Flipkart by 15 percent.

Meanwhile, in a major step aimed at charting out a profitable route in the near-to-medium term, Flipkart is reportedly taking measures to cut costs by around 30 percent. As a part of its planned measures, the E-commerce major will be resorting to merging departments, keep hiring at a minimum and undertake centralising purchases, the Economic Timesreport said.

As part of the excercise, Flipkart will be merging the engineering departments of the logistics arm Ekart and the advertising and E-commerce units, while independent categories such as large appliances, small appliances, furniture, home decor, kitchen and furnishing will be clubbed into one — home, the report said.

Further, the company is also merging procurement for all functions such as media buying, promotions, IT, supplies and warehousing based on the assumption that the centralised unit will be in a better position to negotiate deals with vendors rather than multiple teams doing so individually.

So, is it the start of such cost-rationalisation measures to be undertaken by other major players to turn profitable going ahead?

Industry experts feel unless these companies create a sustainable business model, rising competition will force many of these firms to shut shop.

Tech investor T V Mohandas Pai early last month said, "E-tailers are realising now they can't go on using capital to subsidise consumers to give deep discounts and grow the topline because the moment they withdraw the discounts, the topline falls.

"So they have to create a sustainable model where the top line keeps growing because they give better goods and better efficiency at decent prices," the former Chief Financial Officer, HR Head and Board member of Infosys had said.

"Next one-two years, there will be very tough competition for e-tailers. We may see some people failing," added Pai.

Pai had indicated that even big guys could fail, and hence it is more important for these e-tailers to cut costs, and make their money go a longer way to create sustainable models.

The losses of the top 22 online start-ups in the country soared by 293 per cent at Rs 7,884 crore for a combined revenue of Rs 16,199 crore for the financial year ended March 2015, a Business Standardreport said.

While the top three e-tail players, Flipkart, Snapdeal and Amazon, posted a massive combined loss of Rs 4,984 crore, revenue growth outpaced the growth in losses, the BS report said.

According to a report by Boston Consulting Group and Retailers Association of India cited by ET, India's E-commerce firms are coming under pressure from investors that have poured billions of dollars into them, banking on the potential of Indian market, which is pegged at $40-50 billion by 2020 from $8-12 billion now.